Correlation Between Rio Tinto and London Stock

Can any of the company-specific risk be diversified away by investing in both Rio Tinto and London Stock at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Rio Tinto and London Stock into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Rio Tinto PLC and London Stock Exchange, you can compare the effects of market volatilities on Rio Tinto and London Stock and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Rio Tinto with a short position of London Stock. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rio Tinto and London Stock.

Diversification Opportunities for Rio Tinto and London Stock

-0.35

Correlation Coefficient

Rio Tinto  London Stock

Very good diversification

The 3 months correlation between Rio and London is -0.35. Overlapping area represents the amount of risk that can be diversified away by holding Rio Tinto PLC and London Stock Exchange in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on London Stock Exchange and Rio Tinto is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Rio Tinto PLC are associated (or correlated) with London Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of London Stock Exchange has no effect on the direction of Rio Tinto i.e., Rio Tinto and London Stock go up and down completely randomly.

Pair Corralation between Rio Tinto and London Stock

Assuming the 90 days trading horizon Rio Tinto PLC is expected to under-perform the London Stock. In addition to that, Rio Tinto is 1.75 times more volatile than London Stock Exchange. It trades about -0.07 of its total potential returns per unit of risk. London Stock Exchange is currently generating about 0.43 per unit of volatility. If you would invest  1,071,000  in London Stock Exchange on September 19, 2024 and sell it today you would earn a total of  78,500  from holding London Stock Exchange or generate 7.33% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Rio Tinto PLC  vs.  London Stock Exchange

Rio Tinto PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Rio Tinto PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Rio Tinto is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

London Stock Exchange

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in London Stock Exchange are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, London Stock may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Rio Tinto and London Stock

The main advantage of trading using opposite Rio Tinto and London Stock positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Rio Tinto position performs unexpectedly, London Stock can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in London Stock will offset losses from the drop in London Stock's long position.

The idea behind Rio Tinto PLC and London Stock Exchange pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.